As noted in our prior client alert, the primary goal of the Corporate Transparency Act (the “CTA”) is to limit the use of shell companies to circumvent anti-money laundering regulations, sanctions, and other financing restrictions. The first beneficial ownership reporting rule (the “Rule”) under the CTA is scheduled to go into effect on January 1, 2024, after which date “reporting companies” (as defined under the CTA)1 will have to make filings with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to provide certain information regarding the entity and its “beneficial owners” (such reports, “BOI Reports”).
The following is a discussion of certain implications of the Rule as they relate to private funds and investment advisers.
Exemptions From Definition of “Reporting Company”
Of particular note to private funds and investment advisers, exemptions from the definition of “reporting company” include, among other things, (i) a broker or dealer registered with the Securities and Exchange Commission (“SEC”), (ii) investment companies or investment advisers that are registered with the SEC, (iii) qualifying venture capital fund advisers, (iv) certain pooled investment vehicles, and (v) subsidiaries of certain exempt entities, in each case subject to the conditions set forth below.
- Registered Brokers or Dealers: Brokers or Dealers (as each term is defined in Section 3 of the Securities and Exchange Act of 1934 (the “Exchange Act”)) that are registered under Section 6 or 17A of the Exchange Act are exempt from classification as a “reporting company.”
- Registered Investment Companies: An investment company (as defined in Section 3 of the Investment Company Act of 1940 (the “1940 Act”)) that is registered with the SEC would not be categorized as a “reporting company.”
- Registered Investment Advisers: An investment adviser (as defined in Section 202 of the Investment Advisers Act of 1940 (the “Advisers Act”)) that is registered with the SEC is also exempt from classification as a “reporting company.”
- Venture capital fund advisers (“VCFAs”): A VCFA must both (a) be an investment adviser as described in Section 203(l) of the Advisers Act and (b) have filed Item 10, Schedule A and Schedule B of Part 1A of Form ADV with the SEC in order to avoid categorization as a “reporting company.”
- CFDB Note: Investment advisers that are exempt from registration under Section 203(m) of the Advisers Act as “private fund advisers” do not fall within this exemption.
- Pooled investment vehicle (“PIV”): In addition to registered investment companies noted above, a PIV that would be exempt from classification as a “reporting company” includes any company that would be an investment company but for the exclusions provided in Section 3(c)(1) or 3(c)(7) of the 1940 Act and is advised by a registered investment adviser, broker or dealer, or federal or state credit union.
- CFDB Note: Importantly, PIVs that are operated or advised by exempt reporting advisers or state-registered investment advisers do not qualify for this exemption.
- Additionally, non-U.S. PIVs (e.g., Cayman Islands-domiciled funds) that are registered to do business in the U.S. are not exempt under this exemption. These non-U.S. PIVs will need to find an exemption or file a limited version of a BOI Report. Non-U.S. PIVs that are not registered to do business in the U.S. will not fall within the definition of “reporting company” and thus will not have to file BOI Reports.
- Certain Subsidiaries: A subsidiary that is controlled or wholly owned, directly or indirectly, by one of the following exempt entities: (a) a Broker or Dealer, (b) a registered investment company or investment adviser or (c) a VCFA, will generally not be categorized as a “reporting company.” However, subsidiaries of exempt PIVs are not exempt under this exemption.
- The general partner or managing member of a private fund may qualify under this exemption. Additionally, any entity below such an exempt general partner or managing member that is controlled or wholly owned by the exempt general partner or managing member would also qualify under this exemption.
- Conversely, the Rule is unclear on how the parent company of exempt entities, such as ultimate general partner entities and other upper-tier holding companies, will be treated because FinCEN explicitly declined to provide an express exemption for parent companies. Instead, the fund’s organizational structure will require close analysis to determine whether such entities qualify for an exemption. If these parent entities are controlled or wholly owned by an exempt entity, they may qualify under the subsidiary exemption, but, if not, BOI Reports may be required.
While exemptions and reporting obligations will need to be determined on a case-by-case basis, law firms in the private fund ecosystem have been trying to create guidelines for clients to use to determine which entities may be required to file BOI Reports. Currently, the consensus view is that certain feeder fund vehicles, blockers, aggregators, portfolio companies, and holding companies may not be exempt from the definition of “reporting company” and thus will have to file BOI Reports.2 Furthermore, otherwise exempt entities that invest in nonexempt “reporting companies” may have to be disclosed in the BOI Reports filed by the “reporting company.”
The Rule sets forth separate deadlines for filings depending on when a “reporting company” was formed.
Entities formed before January 1, 2024. An existing entity that is a “reporting company” will have to file an initial BOI Report with FinCEN before January 1, 2025. This means that sponsors will have approximately one year to file a BOI Report for their current entities that qualify as “reporting companies.”
Entities formed between January 1, 2024 and December 31, 2024. A “reporting company” formed on or after January 1, 2024, and before January 1, 2025, will have to file its initial BOI Report with FinCEN within 90 days of its formation.3
Entities formed on or after January 1, 2025. A “reporting company” formed on or after January 1, 2025, will have to file its initial BOI report with FinCEN within 30 days after its formation.
CFDB Recommendations for Private Fund Advisers and Investment Managers
We recommend that clients proactively undertake a complete review of the entities under their purview and create a full inventory of any such vehicles. CFDB is available to assist with this process and will also work with clients to determine what actions, if any, need to be taken to ensure each such entity complies with the Rule.
As an initial matter, clients, with CFDB’s assistance, will need to determine whether an entity is a “reporting company” under the CTA or falls under one of the 23 exemptions set forth in the Rule, including those noted above. If the entity is, or might become, a “reporting company,” next steps will likely include the following:
- Identify the beneficial owner(s) of the entity and inform each beneficial owner of the new reporting obligations under the CTA.
- Gather the required information on both the entity and each beneficial owner and submit the BOI Report during the required time period.
- Develop policies and procedures to (i) track entity and beneficial ownership information and (ii) report any changes to FinCEN within 30 days of such changes, as required by the Rule. One potential solution is to add language to the governing documents of the entity to (a) designate a CTA reporting officer, (b) require beneficial owners to provide the relevant information, and/or (c) impose indemnification obligations on beneficial owners who fail to comply with the CTA’s requirements.
Please note that this alert does not cover all aspects of the CTA or discuss all possible considerations related thereto. Guidance on the CTA and BOI Reports continues to evolve as the effective date for the CTA approaches. CFDB will reach out to clients with supplemental information as it becomes available, and clients can also monitor FinCEN’s website for updates. Please contact a member of your CFDB team or CTAfilings@crokefairchild.com for any inquiries relating to the CTA.
1Under the CTA, “reporting company” is defined to include both domestic and foreign privately held entities. A domestic privately held entity can be a corporation, limited liability company, or other entity created by filing a document with the secretary of state or similar office under the laws of that state. A foreign entity includes any private entity formed under the laws of a foreign country that is registered to do business in a state of the U.S. by filing a document with the secretary of state or similar office under the laws of that state.
2See “FinCEN Beneficial Ownership Information Report: Guidance for the Private Funds Industry,” https://kirkland.widen.net/s/vb5zztsnwb/fincen-beneficial-ownership-information-reporting—guidance-for-the-private-funds-industry
3On November 29, 2023, FinCEN adopted a final rule extending the initial reporting period from 30 days to 90 days during the first year of the Rule’s effectiveness. See https://public-inspection.federalregister.gov/2023-26399.pdf
4 See “Beneficial Ownership Information Reporting Frequently Asked Questions,” https://www.fincen.gov/sites/default/files/shared/BOI_FAQs_Q&A_11.15.23_508C.pdf and “Small Entity Compliance Guide” https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf